Should state tax 'intangible' property, such as stocks?

Idea not popular, but backers say revenue is needed

By LARRY LANGE, SPECIAL TO SEATTLEPI.COM

Updated 4:13 pm, Sunday, May 22, 2011

Has the state's tax burden on homeowners become great enough to start looking at taxing "intangible" property as well?

As state budget shortfalls loom and spending on schools has been cut, a number of people have begun to think so. There are tentative estimates that the state could raise as much as $4 billion each year by taxing assets such as stocks, bonds, mortgages, commodities contracts, patents and trademarks. That's attractive to state lawmakers who worry about maxing-out the property tax burden on the middle class Taxing intangible property would shift it back toward people with more means and help shore up school funding, supporters say.

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"We have an unfair tax system and it doesn't' generate enough money," said state Sen. Maralyn Chase, D-Shoreline, an advocate of taxing intangible property. "I worry about (this) destroying our civilization."

But the idea, predictably, is slow to catch on in Olympia, where more conservative lawmakers oppose any tax increase and skeptics say intangible property values vary too much to be a reliable revenue source.

"This is nothing about changing tax burdens. It's about increasing tax burdens," said Rep. Ed Orcutt, R-Kalama, a ranking member of the House Ways & Means Committee.

Generally, "intangible" properties are things with value that aren't built on the ground or aren't hard cash. They include bank deposits, loans and securities, personal service agreements, trade names, franchise agreements, licenses held by businesses or contract payments receivable.

Back to the future?

Originally the state did tax intangible property, as the state Constitution provided. Legislatures over the years gradually exempted more types of property, and a 1930s constitutional amendment banned taxing property secured by real estate. More exemptions were added 1997, a revenue cut barely noticed in boom years of the 1990s.

Things changed once the recession hit and tax revenues dropped. State education spending began leveling off in 2008 and declined for 2009, 2010 and this year. School supporters worry more cuts and teacher layoffs are on the way, as lawmakers grapple with a $5.3 billion shortfall in operating budget revenue for the next two years and $2 billion in education cuts are considered.

"In 1980 we were 11th (in the nation) in school support, for class size," Chase said. "Now we're third from the bottom." The state has delayed initiatives to reduce class size and faces the loss of billions in federal stimulus money used in schools.

Some have noticed that property ownerships became increasingly composed of "intangibles," part of what's called the "New Economy," though they're not taxed. With that growth, "our state has become a tax haven for millionaires," Chase said.

"EBay, the biggest online auction company, is an example of a company made up of primarily intangible assets," said a 2008 report on the state's tax exemptions. "Property and equipment represented about 10 percent of (its) total assets. Goodwill and intangible assets made up about 34 percent of total assets. Customer lists made up the majority of the intangible assets. Most of the remainder of the assets were cash."

"There has also been growth in intangible personal property in firms like IBM with demonstrated increases in service revenue," the report said. "Another reason for the growth in intangible property is that companies have started to license patents, copyrights and trademarks that were developed as a secondary business. Some businesses may still earn money on licenses long after the physical company has ended."

While this was occurring, an increasing share of the state's property taxes, including those that support schools, were being paid by homeowners as home building boomed and values increased. Homeowners' share of property taxes rose to more than 68 percent in 2007 before dropping to 65 percent during the recession.

"So if homeowners wonder why their property taxes are going up it's because they're being held responsible for a larger percentage of the state property taxes," said David Spring, a North Bend web consultant and former teacher.

After school property tax levies were defeated in his town Spring began raising the tax issue in an unsuccessful campaign for a state legislative seat. Spring opposed one local construction bond issue but said he supported others in his district. His concerns about taxes began, he said, over worries about his daughter's education.

"If we don't fund our public schools, how's she going to get into college?" he said. Others share the concern. State revenues have been limited by tax exemptions granted to a number of companies, including Boeing and Microsoft. A citizens commission examining the state's exemptions said that "given the dramatic growth of intangibles in the New Economy and the impact of such a large exemption on the adequacy, efficiency and fairness of the tax system" the legislature should study the intangibles exemption "and consider how to appropriately treat intangible property."

Spring and Chase wrote a 2009 measure, House Bill 2350, that would have imposed a one percent tax on some intangible properties, exempting retirement accounts and the first $100,000 of value of other "intangibles" from taxation.

The taxes would have raised an estimated $33.4 billion over 10 years. The bill provided for a statewide vote on the proposal. (A separate, State Revenue Department estimate said taxing all intangible property except mortgages and government securities could raise more than $4 billion annually for the state and $17 billion for local governments).

It's another school-finance option after defeats of the state income and beverage tax measures last fall. But the measure never got out of committee, encountering opposition from business and other skeptics.

Besides opposing new taxes, critics said intangibles such as trademarks and patents wouldn't be reliable tax sources because new innovations can displace earlier ones and decrease their value. Determining the worth of intangibles such as trademarks is not as straightforward as measuring the income they produce for a business.

"Tomorrow, somebody comes up with a new little switch that makes that old switch worthless," said Rep. Glenn Anderson, R-Fall City, Spring's election opponent. He has introduced legislation to abolish the business-and-occupations tax in favor of a flat corporate income tax without exemptions. Others question taxing intangible property values that may be elusive.

"Receivables means you don't have them yet," Orcutt said. "Why would we tax you on money you don't have?' Orcutt said even if a new tax were earmarked for schools lawmakers have shifted dedicated money to other uses in the past. If some peoples' incomes increase faster than their property tax bills, "I don't see that as a bad thing but there are liberal Democrats in Olympia" trying to use the fact to expand state programs and spending, he said.

The Revenue Department noted that receipts from the tax would be subject to the one percent property tax increase limitation, which could decrease the amount collected. And its 2008 tax exemption report also said "there would be a significant compliance problem, because intangibles are easily concealed or moved to other states."

One tax policy consultant, Harley Duncan of KPMG, said current sentiment favors taxing the income produced by intangibles, rather than their basic value. "It's simpler," Duncan said.

But seven states still tax intangible assets. Chase argues that the shift in wealth requires a new look at the tax system and she and others will try to keep the "intangibles" idea alive. What has happened "is good for one level of the economy but what's happening to the rest of the people?" Chase said. "This issue needs to be on the table."